Imbalances in supply and demand often cause the price for the same good
to vary across geographic locations. Economic theory suggests that if
the price differential is greater than the cost of transporting the good
between locations, then buyers will shift demand from high-price
locations to lowprice locations, while sellers will shift supply from
low-price locations to high-price locations. This should make prices
more uniform and cause the overall market to adhere more closely to the
&ldquo;law of one price.&rdquo; However, this assumes that traders have
the information necessary to shift their supply/demand in an optimal
way. We investigate this using data on over 2 million transactions in
the wholesale used vehicle market from 2003 to 2008. This market has
traditionally consisted of a set of non-integrated regional markets
centered on market facilities located throughout the United States.
Supply / demand imbalances and frictions associated with trading across
distance created significant geographic price variance for generally
equivalent vehicles. During our sample period, the percentage of
transactions conducted electronically in this market rose from
approximately 0% to approximately 20%. We argue that the electronic
channel reduces buyers&rsquo; information search costs and show that
buyers are more sensitive to price and less sensitive to distance when
purchasing via the electronic channel than via the traditional physical
channel. This causes buyers to be more likely to shift demand away from
a nearby facility where prices are high to a more remote facility where
prices are low. We show that these &ldquo;cross-facility&rdquo; demand
shifts have led to a 25% reduction in geographic price variance during
the time frame of our sample. We also show that sellers are reacting to
these market shifts by becoming less strategic about vehicle
distribution, given that vehicles are increasingly likely to fetch a
similar price regardless of where they are sold.

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